N.Y. Proposes Tax on For-Profits

State plan would charge commercial colleges a portion of their financial aid, and use fees to pay for fraud inquiries.
May 17, 2006

The New York State Education Department is considering imposing the equivalent of a tax on for-profit colleges in the state -- and using the proceeds of the fee to cover the cost of investigating fraud and abuse at commercial institutions.

According to a recent draft of the proposal obtained by Inside Higher Ed, the department would charge all proprietary institutions a fee equal to 0.1 percent of the annual state and federal financial aid they receive, but no less than $10,000 per institution per year. “Timely payment of fees shall be a condition to continue operation as a degree-granting institution in New York state,” according to the proposal.

About 40 institutions are members of the Association of Proprietary Colleges in New York, many with a substantial portion of students who depend on financial aid programs.

The fee, a higher education official with the department confirmed, would be used to help the New York Board of Regents, which governs the Education Department, offset the cost of investigating fraud and abuse complaints at for-profit institutions. The board oversees not only for-profit higher education institutions, but also the state’s independent colleges and the City and State Universities of New York. “The state has to do all of this with its existing budgetary constraints and staff members,” the official said.

Margaret Watrouse, a researcher with the department, said Tuesday that a finalized report is in the process of being prepared. The proposal would have to be voted on by the state’s General Assembly and then signed into law by Gov. George Pataki to ultimately take effect. 

For-profit advocates said Tuesday that Stephen J. Jerome, chair of the Association of Proprietary Colleges and president of Monroe College, does not support the draft as it currently stands. He did not respond to direct requests for comment for this article.

“The major concern is separating the sectors of higher education in the state,” according to a close associate of Jerome, who asked not to be identified. “The proposal currently on the table -- which by no means is a done deal -- just deals with for-profits.”

Jerome has argued that singling out the commercial college sector is unfair, since fraud and abuse occurs at all institutions. Others argue that for-profit colleges that don’t receive much financial aid would end up paying less than poorer institutions. Many for-profits in New York serve poor students, often members of minority groups.

“There may be a feeling in the State Education Department that the proprietaries are awash in money,” said one for-profit official, who asked not to be identified. “The truth is, many not-for-profit colleges operate in the black each year. Among the independent colleges, their ‘profit’ goes back into their endowments or to current expenses. It is a bad year indeed when they have to dip into endowment funds. So why pick on the proprietaries?”

Alternative proposals have been floated to the Department of Education, including having all accredited institutions pay a fee, regardless of their institution type, or charging only institutions that are in need of special reviews by the regents. A department spokesman could not say whether the department will take these ideas into consideration.

The proposal comes amid a series of crackdowns in New York on for-profits. In January, the state placed a moratorium on the establishment of new programs by for-profit colleges, while officials examine perceived abuses and the state’s existing policies to combat them. The New York Times broke the story in December with an investigation into the Interboro Institute, and since that time public scrutiny of for-profits in the state has intensified.  

Governor Pataki also proposed budgetary changes this year that would have dramatically altered the ability of for-profits to collect financial aid monies for needy students. The measure ultimately did not succeed.

The costs of lengthy investigations at Interboro in 2005 have contributed to the perceived need for the Education Department's proposal, according to several higher education officials in the state. The institution was accused last year of fraudulently enrolling students to capture federal and state financial aid funds. Numbers on how much that investigation cost was not readily available from the New York Board of Regents on Tuesday.


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